Understanding Your Annual Social Security Letter

Article Highlights:

  • Medicare B Premiums
  • Medicare D Premiums
  • Modified AGI
  • 2020 Premiums Table
  • Effect of Recreational Gambling
  • Appealing the Social Security Administration’s Decision

If you are receiving Social Security, then you have just recently received your annual letter from the Social Security Administration letting you know that your Social Security benefits for 2020 have increased by 1.6 percent as a result of a rise in the cost of living. The letter also lets you know how much will be withheld from your monthly retirement benefit for Medicare Parts B (medical insurance) and D (Prescription Drug Plan).

Not everyone realizes their Part B and Part D benefits are based upon their modified adjusted gross income (MAGI) from two years prior. This means the premiums for 2020 are actually based on your MAGI for 2018. The MAGI for making the adjustment is the federal AGI plus the following:

  • Tax-exempt interest income
  • United States savings bonds interest used to pay higher-education tuition and fees, if the interest was excluded from income
  • Excluded foreign earned income and housing costs
  • Income derived from sources within Guam, American Samoa, or the Northern Mariana Islands
  • Income from sources within Puerto Rico

 

2020 MEDICARE PREMIUMS
TAXPAYER FILING STATUS Medicare Part B Monthly Premiums Medicare Part D**
Individual* Married Filing Joint MAGI Increase Total Surcharge
2018 MAGI less than or equal to $87,000 2018 MAGI less than or equal to $174,000 $0.00 $144.60 $0.00
2018 MAGI greater than $87,000 and up to $109,000 2018 MAGI greater than $174,000 and up to $218,000 $57.80 $202.40 $12.20
2018 MAGI greater than $109,000 and up to $136,000 2018 MAGI greater than $218,000 and up to $272,000 $144.60 $289.20 $31.50
2018 MAGI greater than $136,000 and up to $163,000 2018 MAGI greater than $272,000 and up to $326,000 $231.40 $376.00 $50.70
2018 MAGI greater than $163,000 and less than $500,000 2018 MAGI greater than $326,000 and less than $750,000 $318.10 $462.70 $70.00
2018 MAGI greater than or equal to $500,000 2018 MAGI greater than or equal to $7500,000 $347.00 $491.60 $76.40

 

*The increases for a married taxpayer who lived with his or her spouse at any time during the year and files a separate return are:

  • If 2018 MAGI was $87,000 or less: no surcharge for either Part B or Part D
  • If 2018 MAGI was $87,001 to $412,999: Part B $462.70 and Part D $70.00
  • If 2018 MAGI was $413,000 or above: Part B $491.60 and Part D $76.40

**The monthly Part D surcharge is in addition to the drug plan’s premium.

You might discover that even though your monthly Social Security benefits increased because of inflation, the net amount you receive may actually be less per month because of increases in Medicare Part B and D premiums. Such increases are attributable to increased MAGI in 2018, but one might encounter a hidden source of income. This applies to recreational gamblers whose winnings are included in their MAGI, but whose losses are an itemized deduction. Thus, even though the overall result may be a loss, the MAGI is increased by the full amount of the gambling winnings, therefore possibly causing increases in the Medicare Part B and D premiums.

On the other hand, if 2017 had been a high-income year and your income in 2018 was substantially less, your 2020 Medicare Part B and D premiums may be less than they were in 2019, resulting in a larger net monthly check.

The letter you received from the Social Security Administration does include an appeal process if you disagree with the Social Security Administration’s decision to increase your premiums. However, this appeal must generally be made within 60 days after receipt of the letter. Unfortunately, an increase in your 2018 MAGI that put you into the surcharge range for 2020 and was a result of capital gains due to a one-time sale of real property or stock, isn’t a valid reason for an appeal.

If you have questions related to your Social Security benefits and their taxation, please contact us. There are often planning strategies that may lessen the tax bite and premium costs.

Should You Have an Identity Protection PIN?

Article Highlights:

  • Taxpayer First Act
  • Taxpayer Notification when a SSN is Fraudulently Used
  • Purpose of an IP PIN
  • Obtaining an IP PIN
  • Is an IP PIN Right for You?

With the passage of the Taxpayer First Act in mid-2019, the Treasury Department (i.e., the IRS) is required to establish a program to issue an identity protection pin (IP PIN) to any U.S. resident who requests one. For each calendar year beginning after the date of enactment, the IRS must also expand the issuance of IP PINs to individuals residing in such states as the IRS deems appropriate, provided that the total number of states served by the program continues to increase.

Victims of identity theft and refund fraud are often unaware that their identity had ever been used fraudulently. If they become aware of the situation, they’re not always aware of the outcome of their case. 

The Taxpayer First Act addresses this situation by requiring that the IRS notify a taxpayer if it determines any of the following: 

  • there has been suspected unauthorized use of a taxpayer’s identity or of that of the taxpayer’s dependents; 
  • an investigation initiates; 
  • whether the investigation substantiated any unauthorized use of the taxpayer’s identity; 
  • and whether any action has been taken on an open investigation (such as a referral for prosecution). 

Furthermore, when an individual is charged with a crime, the IRS must notify the victim as soon as possible, giving the victim the ability to pursue civil action against the perpetrators.

An IP PIN is a six-digit number assigned by the IRS to eligible taxpayers. This pin helps prevent the misuse of taxpayers’ SSNs on fraudulent federal income tax returns.

The IP PIN was initially established several years ago to aid taxpayers whose SSNs were compromised, and there was a concern their SSNs could be used to file a fraudulent return. Recently, as a result of the Taxpayer First Act, the IRS has opened the IP PIN system to a variety of taxpayers.

In addition to taxpayers whose SSNs the IRS has determined are compromised for tax-filing purposes, IP PINs now are available to those who

  • filed their federal tax return last year as a resident of Florida, Georgia, the District of Columbia, Michigan, California, Maryland, Nevada, Delaware, Illinois, or Rhode Island, or
  • received an IRS letter inviting them to “opt-in” to get an IP PIN.

Requesting an IP PIN is strictly voluntary. If you choose not to participate in the program, you can file your return as you normally would. If you are assigned or if you request an IP PIN, you must use it along with your SSN, to confirm your identity on any tax returns filed electronically during the calendar year. A new IP PIN is generated for each filing season and can be retrieved starting in mid-January of each year by logging into the account you create with the IRS. At this time, if you choose to receive an IP PIN, you must use your IP PIN on all 1040 (current year and delinquent) returns filed during the calendar year.

To obtain an IP PIN, you must pass the IRS’s identity verification secure access process. To do that, you must register with the IRS and set up an online account that is only accessible with a username and password established during the registration process. This can require a substantial amount of verification information so the IRS can make sure you are not trying to obtain an IP PIN for someone with a stolen identity. Next, you have to log into the IRS IP PIN Section, which requires double authentication: a password plus a 6-digit code that the IRS sends to your cell phone. Once you complete this process, you can retrieve your IP PIN.

Is an IP PIN right for you? That depends; the process is quite complicated, and you get a new number every year. When deciding, it can help to weigh the inconvenience it creates when your SSN has not been compromised with knowing you can always obtain an IP PIN if your SSN is compromised in the future. The decision is up to you.

Of course, if the IRS has already sent you a CP01A Notice, the annual communication from the IRS containing your unique 6-digit IP PIN and instructions on how to use it, you are already in the system.

If you have questions about IP PINs, please contact us

Minimizing Tax on Social Security Benefits

How much (if any) of your Social Security benefits are taxable depends on a number of issues. The following facts will help you understand the taxability of your Social Security benefits.

  • For this discussion, the term “Social Security benefits” refers to the gross amount of benefits you receive (i.e., the amount before any reductions due to payments withheld for Medicare premiums). For tax purposes, Social Security benefits are treated the same regardless of whether the benefits are paid due to disability, retirement, or reaching the eligibility age. Supplemental Security Income benefits are not included in these computations because they are not taxable under any circumstance.
  • The taxability of your Social Security benefits depends on your total income and marital status.
    o If Social Security is your only source of income, it is generally not taxable.
    o On the other hand, if you have other significant income, as much as 85% of your Social Security benefits can be taxable.
    o If you are married and filing separately, and if you lived with your spouse at any time during the year, 85% of your Social Security benefits are taxable—regardless of your income. This is to prevent married taxpayers who live together from filing separately to reduce the income on each return and thus reduce the amount of Social Security income that is subject to tax.
  • The following quick computation can be done to determine if some of your benefits are taxable:
    Step 1. First, add half of your total Social Security benefits to your total other income, including any tax-exempt interest and certain other exclusions* from income.
    Step 2. Then, compare this total to the base amount that is used for your filing status. If the total is more than the base amount, some of your benefits may be taxable.
The base amounts are:
  • $32,000 for married couples filing jointly;
  • $25,000 for single persons, heads of household, qualifying widows/widowers with dependent children, and married individuals filing separately who did not live with their spouses at any time during the year; and
  • $0 for married persons filing separately who lived together during the year.
*These exclusions are as follows: the interest from qualified U.S. savings bonds (used for education expenses), employer-provided adoption benefits, foreign earned income or foreign housing income, and income earned by bona fide residents of American Samoa or Puerto Rico.

When taxpayers can defer their non-Social Security income from one year to another, such as by taking individual retirement account (IRA) distributions, they may be able to plan their income so as to eliminate or minimize the tax on their Social Security benefits in a given year. However, the required-minimum-distribution rules for IRAs and other retirement plans have to be taken into account.

Individuals who have substantial IRAs and who either aren’t required to make withdrawals or are making their post-age-70.5 required minimum distributions (but are not withdrawing enough to reach the Social Security tax threshold) may be missing an opportunity for tax-free withdrawals. Everyone’s circumstances are different, however, and what works for one person may not work for another.

If you have questions about how these issues affect your specific situation, or if you wish to do some tax planning, please give us a call.

Little-Known Tactic Increases Child Care Credit

When both spouses in a married couple are jointly involved in the operation of an unincorporated business (generally a Schedule C), it is fairly common – but incorrect – for all of that business’s income to be reported as just one spouse’s income, even when they both work in the business.

In such cases, the spouse not taking credit for his or her portion of the earned income loses out on the chance to accumulate his or her own eligibility for Social Security benefits. In addition, to claim a child care credit, both spouses on a joint return must have earned income (or imputed income if one of the spouses is a full-time student or is disabled), so unless the spouse not including a portion of the income from the joint business has another source of earned income, the couple will not be allowed a child care credit.

There are ways to remedy this situation, however. One option is to file a partnership return for the activity, in which case each spouse will receive a K-1 that reports his or her share of the net profit. An approach that avoids the necessity of filing a partnership return, and that is probably less complicated, is a qualified joint-venture election, in which each spouse elects to file a separate Schedule C for his or her respective share of the business. This gives them both self-employed income for the purposes of the self-employment tax and for claiming the child care credit.

A qualified joint venture refers to any joint venture involving the conduct of a trade or business if:

(1) The only members of the joint venture are husband and wife,
(2) Both spouses materially participate in the trade or business, and
(3) Both spouses elect to apply this rule.

Generally, to meet the material participation requirement, each spouse will have to participate in the activity for 500 hours or more during the tax year.

If the net income from the business exceeds the annual cap on income subject to the Social Security tax, the combined self-employment tax for the spouses with split Schedule Cs will exceed what a single spouse would have paid if he or she had filed a single Schedule C.

An additional benefit when filing split Schedule Cs is the opportunity for both spouses to participate in IRAs and self-employed retirement plans.

If you have questions about how splitting the business income between spouses might apply to your specific situation, please contact this office.

Minimizing Tax on Social Security Benefits

Whether your Social Security benefits are taxable (and, if so, how much of them are) depends on a number of issues. The following facts will help you understand the taxability of your Social Security benefits.

  • For this discussion, the term “Social Security benefits” refers to the gross amount of benefits you receive (i.e., the amount before reduction due to payments withheld for Medicare premiums). The tax treatment of Social Security benefits is the same whether the benefits are paid due to disability, retirement or reaching the eligibility age. Supplemental Security Income (SSI) benefits are not included in the computation because they are not taxable under any circumstances.
  • How much of your Social Security benefits are taxable (if any) depends on your total income and marital status.

    o If Social Security is your only source of income, it is generally not taxable.

    o On the other hand, if you have other significant income, as much as 85% of your Social Security benefits can be taxable.

    o If you are married and filing separately, and you lived with your spouse at any time during the year, 85% of your Social Security benefits are taxable regardless of your income. This is to prevent married taxpayers who live together from filing separately, thereby reducing the income on each return and thus reducing the amount of Social Security income subject to tax.

  • The following quick computation can be done to determine if some of your benefits are taxable:

    Step 1. First, add one-half of the total Social Security benefits you received to the total of your other income, including any tax-exempt interest and other exclusions from income.

    Step 2. Then, compare this total to the base amount used for your filing status. If the total is more than the base amount, some of your benefits may be taxable.

The base amounts are:

  • $32,000 for married couples filing jointly;
  • $25,000 for single persons, heads of household, qualifying widows/widowers with dependent children, and married individuals filing separately who did not live with their spouses at any time during the year; and
  • $0 for married persons filing separately who lived together during the year.

Where taxpayers can defer their “other” income from one year to another, such as by taking Individual Retirement Account (IRA) distributions, they may be able to plan their income so as to eliminate or minimize the tax on their Social Security benefits from one year to another. However, the required minimum distribution rules for IRAs and other retirement plans have to be taken into account.

Individuals who have substantial IRAs—and who either aren’t required to make withdrawals or are making their post age 70.5 required minimum distributions without withdrawing enough to reach the Social Security taxable threshold—may be missing an opportunity for some tax-free withdrawals. Everyone’s circumstances are different, however, and what works for one may not work for another.

If you have questions about how these issues affect your specific situation, or if you wish to do some tax planning, please give this office a call.